The point of no return

Bear-Stearns and China: A "sweet dream" of globalization.

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April 18, 2006 2:36AM (UTC)

Another fiscal quarter, another 10 percent growth rate for China. OK, OK, technically, it was the highest growth rate in three years, but that's quibbling. The thrust of news analysis has been consistent: China's still growing really, really fast, and that could put even more pressure on the summit meeting this Thursday between Premier Hu Jintao and President Bush.

Indeed, the last thing Hu probably wanted to see in the Wall Street Journal this morning, assuming he had time to skim the headlines before heading off to meet with Boeing and Microsoft, was that a Chinese bank was considering buying a big stake in the American investment bank Bear-Stearns. While unlikely to engender the same political heat that CNOOC's attempt to buy Unocal did, the negotiations still come at a dicey time. Hu's trip to Seattle is meant to encourage U.S. policy makers into believing that China will buy more big-ticket items (like Boeing jets) and do more to protect intellectual property rights (such as those belonging to Microsoft). Having a Chinese state-controlled bank become the largest single investor in an American bank may not send the same soothing signals.

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But the most interesting signal received here was one generated by a quote in the Journal's coverage from Donald Tang, the mainland-China-born vice chairman of Bear Stearns, who is reputedly a leading advocate of the deal. According to the Journal, Tang gave a speech at the Asia Society in Los Angeles recently, where he said, "Nearly three decades ago, whatever happened in China was of little consequence to America, and vice versa. Fast-forward and look what globalization has done. Our interdependence has reached the point of no return. To some of us, especially to me, this has been more than a miracle: It has been a sweet dream."

Maybe it should come of no surprise that an investment banker considers the interdependence born of globalization "a sweet dream." But it was the "especially to me" that caught my attention. Tang grew up in Shanghai but received a chemical engineering degree from Cal State Pomona in 1986. For him, the embrace between the United States and China is an obviously personal affair. In another speech to the Asia Society last year, commemorating the establishment of a new electronic investment exchange in China, he elaborated on the interconnections.

"China is critical to us in the West. As we are to China. A condition that will only increase as China rapidly evolves into our principal business partner this century.

"This is inevitable. We can't escape it. Neither can they ... Lets take one example: Everybody knows the Chinese manufacturing economy is gigantic. In many ways, it is at the heart of our global capacity to produce quality goods economically and efficiently. In many ways, this Chinese manufacturing economy makes the 'inflationless expansion' we rely on in the West possible. In that regard, it guarantees our high quality of life. We rely on it. We perceive it as a powerful force. But it is also a fragile force. In a necessary rush to expand into the realms of production and manufacturing to shore up their economic base and to create a platform of value in world markets, China becomes a powerhouse, yes, but a powerhouse without pricing punch.

"We in the U.S. are in an inflationless expansion mode. They in China are in a profitless one. They are the dominant producer. We are the supreme innovator -- and consumer. But they trail alarmingly in their capacity to create brands, drive demand, and control their own distribution channels. That leaves China vulnerable to global economic downturns. A global economic sneeze could become a global economic flu in China. Which, in turn, would trigger global recession -- or the unthinkable.

"A demand slowdown would lead to factory overcapacity and unemployment at dangerously high levels. This would be devastating to China. And to us. We're linked."

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Tang belives there is a "win-win" answer to all the tensions afflicting the U.S.-Chinese relationship. That is a tall order, given the intractable nature of many of the issues in dispute -- currency revaluation in China, stagnant worker wages in the United States, competition over energy resources, anger over intellectual property violations... To wrap up everything that divides the two countries in a fashion that deepens linkages instead of snapping them, that, truly, would be a sweet dream of globalization.